BSE-GREENEX Index - Energetica India

SUISTANABLEDEVELOPMENT
BSE-GREENEX Index
Bharat Vasandani, Energetica India
India’s NAPCC looks to marry climate change with economic development. India has and
will see more initiatives to look at sustainable business. One more step towards this goal
is BSE-GREENEX Index. Energetica India studies the details of the new Index.
T
he Indian National Action Plan on
Climate Change (NAPCC) is looking
constituted by the Prime Minister’s
Council recognises the threat posed by climate change. The objective of NAPCC is to
marry climate change to development concerns in no uncertain terms. The first line
states “India is faced with the challenge of
sustaining its rapid economic growth while
dealing with the global threat of climate
change”.
Business houses have begun to acknowledge the phenomenon. They are
concerned about climate change, and the
systemic and sector-specific risks associated with it. Owing to the high levels of
risk faced by countries such as India, the
immediate need to shift to a low carbon
growth path is clear. In turn, low carbon
strategies can only be implemented if the
emissions landscape across businesses and
its effect on sustainable growth are clearly
defined and understood.
One of the industry steps towards this
is BSE-GREENEX Index. The BSE-GREENEX
is the 25th dynamic index hosted on the
Bombay Stock Exchange. It is a first of its
kind benchmark index, which assess the
‘carbon performance’ of stocks based on
purely quantitative performance based criteria.
The index model was developed by
BSE in collaboration with the premier Bschool Indian Institute of Management,
Ahmedabad (IIM-A). The Index will enable
investors take more informed investment
decisions about companies in the energy
intensive sectors, amongst others. As part of this joint venture project, IIM-A evaluated the firms on carbon side based on the information put
by them in public domain (annual reports), while BSE’s main role was to detail on financial side of these compa46
MARCH12
ness entities in India. BSE Ltd. in close association with gTrade Carbon Ex Ratings
Services Private Limited (gTrade) has codeveloped the BSE-GREENEX.
The mission of gTrade is to create viable market based solutions for industries,
investors and governments, to promote
energy efficient practices and encourage
impact investing in economically and environmentally sustainable businesses. It seeks
to achieve its mission by developing and
promoting a “green ethos” in high growth
nies and provide technical backup for it. developing nations through market based
Like the best performing stocks of compa- push and pull factors by providing financial
nies make it to the Sensex-30 and the exist- tools to investors. The BSE-GREENEX is the
ing ones have to exit for non-performance, outcome of the joint collaboration which
BSE-GREENEX will too witness firms com- consists of 20 largest and most efficient
ing and going. The concept is all about companies on the carbon emissions front
screening companies doing well on carbon from the BSE-100 Index.
One of the parameters for measureside, as the concern for climate change is
ment of environmental performance used
growing among the stakeholders.
The index can be used to develop in BSE-GREENEX calculation, and received
green financial products including mu- from gTrade, is emissions intensity viz. totual funds, exchange-traded funds and tal emissions upon total revenue (which is
structured products. Further, the index is assumed to be a close proxy for energy efexpected to enable investors to take more ficiency). Mandatory disclosures on energy
informed investment decisions on compa- usage by assessed companies make it posnies in the energy-intensive sectors. It will sible to estimate these numbers for listed
help screen companies doing well on the companies.
Additionally, BSE-GREENEX is the first
carbon side, as the concerns of climate
environmental friendly equity index to be
change is growing among stakeholders.
Unlike existing global indices that publicly disseminated on a real-time basis,
measure environmental performance providing a new tool for use by “green”
through various scaled quantitative crite- retail and institutional investors to track
ria, the BSE-GREENEX applies sector spe- the performance of India’s largest and
cific proprietary algorithms, developed in most liquid, energy efficient stocks. The
cutting edge research facilities, to assess index can be licensed for the development
energy efficiency performance of various of green financial products including mucompanies based on publicly disclosed en- tual funds, ETFs and structured products.
BSE-GREENEX is also India’s first obergy and financial data.
The BSE-GREENEX is a veritable first jective green equity index to employ index
step in creating an inclusive market based constituent weight capping. Index conmechanism for the promotion of energy stituent weights are capped at 6 percent
efficient practices amongst the larger busi- during dynamic rebalancing, in an effort
energetica india
SUISTANABLEDEVELOPMENT
Companies on GREENEX India
Housing Development Finance Corporation
Cipla
Industry
Finance
Healthcare
Bharat Heavy Electricals
State Bank of India
Capital Goods
Finance
Dr.Reddy
Healthcare
Lupin
Healthcare
Reliance Infrastructure
Tata Power
Ambuja Cements
Tatat Iron
L&T
Power
Power
Housing
Metal & Mining
Capital Goods
Tata Motors
GlaxoSmithKline Pharma
Hindustan Unilever Ltd
Sterlite Industries
Transport Equipments
Healthcare
FMCG
Metal & Mining
Sun Pharmaceutical
Healthcare
GAIL India
Oil & Gas
ICICI Bank
Finance
NTPC
Power
DLF Ltd
to increase the diversification within the
index and ensure greater compliance with
international regulatory and statutory investment guidelines.
Carbon intensity of a company is
estimated as total greenhouse gas emissions from a company divided by its total
revenue. This is estimated on an annual
basis following methodologies and best
practices. Data for BSE annual reports on
multiple parameters purchased electricity), energy generation (when raw material
data (for the Cement Sector) from Form
‘A’s (of annual reports of listed companies
were extracted for use in the GHG inventorying model developed specifically for
this effort.
The 2006 IPCC Guidelines for National Greenhouse Gas Inventories were
followed for energy and process related
emissions for listed companies. In case
this data was not disclosed by a company,
its financial data such as power and fuel
expenditure was used through appropriate econometric modelling to estimate its
GHG emissions.
The analysis adopts multiple methods
for calculating GHG emissions for companies depending on the industry segment
and business operations of company, and
also availability of appropriate information
for those sectors.
BSE-GREENEX includes the top 20
companies from the BSE-100 Index, which
are good in terms of Carbon Emissions,
48
MARCH12
Housing
Free-Float Market Capitalization and Market Turnover. The Index is a Cap Weighted
Free-Float Market Capitalization weighted
Index.
BSE Ltd. should have the recent Carbon Intensity Number calculated by gTrade
prior to the rebalancing date i.e. every year
in September. In case BSE Ltd. doesn’t have
the recent Carbon Intensity Number for a
company, the company will be deemed ineligible for the Index.
Once the Carbon Intensity Numbers
are available from gTrade, the process utilized by BSE Ltd. to arrive at the final selection of stocks in to the BSE-GREENEX is as
follows:
1. Scale the Carbon Intensity (C), Average
Free-Float Market Capitalization (M) &
Average Turnover (T), from 0 to 100
within the sector.
2. Assign points to the above mentioned
numbers from 1 -50 within the sector.
For C: For 0-2, assign 1; for 2-4, assign
2; and so on. For M & T: For 0-2, assign
50; for 2-4, assign 49; and so on.
3. Calculate the composite point for a
company by taking the summation of
the points multiplied by their respective weights, where C is weighted
50%, M is weighted 40% and T is
weighted 10%.
4. Rank the companies on the basis of
the composite point.
5. For base composition take top 20 companies.
6. Review frequency: Bi-Annual (September & March) For September review,
recent Carbon Intensity numbers received from gTrade, Average Market
Capitalization and Average Turnover
for quarter ended September is taken
into account. For March review, the
Carbon Intensity numbers with BSE
Ltd. received in September of the previous year from gTrade, Average Market Capitalization and Average Turnover for quarter ended March will be
taken into account.
7. On-going review: Mandatory Exclusions: If the existing constituent ranks
beyond 28 (i.e. 29, 30….) by final rank
the company will be excluded. Mandatory Inclusions: If a non constituent
ranks within 12 (i.e. 1 to 11) than the
company will be included.
8. Capping individual stock at 6%. Capping done at each rebalancing or inclusion/exclusion from the index between
two rebalancing.
9. In case a company is excluded from
BSE-100, the same will also be excluded from this index.
10.If an index constituent is traded under
the ‘Ex-Entitlement’ basis it will be excluded from the Index. This is done because during this period BSE is unable
to ascertain the valuation of the constituent and valuation of a constituent
is required for Index calculation.
11.Upon re-listing from suspension or
from ex-entitlement, the company
becomes part of the regular stock
universe that can be considered for inclusion in the index upon subsequent
review.
12.Rebalancing dates post Index review
are:
• 2nd Monday of October for the September review.
• 2nd Monday of April for the March
review.
Another index working on not the
same but similar basis is the Dow Jones
Sustainability Index.
The approach is in line with push by
government to get companies to become
more energy efficient. Greenex Index will
catch up when companies understand that
this (sustainable business) is a responsible
form of doing business and adds to the
brand image of the corporation.
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